Market Insider

How Low Can You Go?

July 22, 2016

For the past three to four weeks, grain prices have been moving lower. At the beginning of this week, new weather models suggested to the market that scorching heat would hit the United States (U.S.) Midwest the last two weeks of July (albeit not record heat). The 90-100-degree temperatures forecasted in the long term has reiterated the “La Nina is coming!” declarations by the bulls, but rain is failing in these areas ahead of the heatwave, likely alleviating some of the incoming stress. Further, the United States Department of Agriculture (USDA) is still rating 76 per cent of U.S. corn good-to-excellent and 71 per cent of soybeans as good-to-excellent suggesting that the expected average U.S. yields of 168 and 46.7 bushel per acre, respectively, could be on the low side.

Our call here at FarmLead since spring has been that we while do not doubt that La Nina is making its way into the game, just that it will not have a massive impact on the North American crop potential this year. More specifically, the National Oceanic and Atmospheric Administration (NOAA) dropped their expectations of a fall/winter La Nina to 55 per cent to 60 per cent (from 75 per cent last month) and the latest forecasts from the International Research Institute for Climate and Society are expecting a weak event by early August or September. Accordingly, we continue to think South American crops are likely the first to feel pain from The Girl and that the 2017/18 North American crop could possibly be impacted a bit.

On that note, with the transition from El Nino to La Nina happening, India has been getting above-average monsoon rains, which combined with relatively optimistic crop conditions acres have increased everywhere (Canada, U.S., Australia, the Black Sea). Peas prices have started to pull back a bit. As per the PDQ grain pricing website pdqinfo.ca, pea prices are now hovering in the high $7.00’s/bushel, which confirms our call earlier in the year of locking in as much as possible with an Act of God was the right play. However, the reports of lentil acreage being lost in the Canadian Prairies have seen small red prices return to low 30’s (¢/lbs) and large greens in the low 40 cents, with our best-price-scenario upside getting into the low 40’s for reds and near 50 for large greens if the crop continues to deteriorate.

Flipping crops, spot cash prices absolutely tanked this past week as the transition into new crop supplies is clearly evident. As per pdqinfo.ca, hard red spring wheat dropped almost 9 per cent (-12.7 per cent from last month), durum was down 10 per cent (-16.5 per cent), CPS wheat dropped 11.5 per cent for the week, canola sank 9.5 per cent (-12.6 per cent), and yellow peas are sitting now 10 per cent lower for the week (-17.6 per cent). The majority of the week-over-week decline is attributed to the futures markets pulling back on the U.S. dollar sitting at a four month high, crop conditions remaining elevated, and bullish 10-14 weather forecasts not materializing.

For other crops, flax prices are remaining bearish as, even with Canadian acres 23 per cent lower than the five year average, carryout here is expected to be four times last year’s at 350,000 MT and add in ample European supply and slower Chinese demand, prices are holding in around $12/bushel. Oats doesn’t have much price direction, still sitting in the mid $2s/bushel while feed grains continue to be pressured by bigger supply available in both Canada and the U.S. the closer we get to harvest.

That being said, there’s a bounty of lower quality wheat out there, making it more competitive with corn for feedstuffs, currently trading on the international market at about a $8/tonne discount. While the wet weather in Western Canada may put more quantity into the feed market, quality effects are not yet 100 per cent known, which is why protein spreads haven’t started to widen yet. However, as the U.S. winter wheat crop has come off bigger than expected, the protein values haven’t been as good, which is why you are seeing about an 80 cent/bushel spread between Minneapolis and Kansas City futures prices. Things paints a picture for more demand for the spring wheat crop as millers substitute that crop for winter wheat. For durum wheat, European farmers are selling as quality is coming in better than expected with two thirds of the crop harvested, an obvious reason for Canada’s slowing of exports in the past two months (and pushing prices to lows that we haven’t seen since 2013).